posted on April 20th 2020 in Market Commentary & San Diego CFP Team Posts & WorthPointe News with 0 Comments /

“Wow.” When I pause, look out the window, and think about the current state of affairs, that’s the word that most easily slides off the tongue — and I know those of you I’ve spoken with recently share that sentiment. There’s no question we’re all in this together and my first thoughts are for the safety, health, and well-being of you, your family, and your friends. 

We’re faced with an overload of information, and it seems every hour there are changes and refinements to what we’ve heard, so it’s a very dynamic environment. With that being said, I’d like to provide some clear and concise perspective. 

The Issue: Years from now, when we look back on this time in history, I believe we’ll see the main issue we faced was a moral dilemma that boils down to a kind of Sophie’s choice. Arguably, the most significant negative impact on a majority of people’s lives is not the coronavirus itself, but the effects of our reactions and solutions in dealing with it. To be sure, one death is significant to all involved and the seriousness of the issue is impossible to minimize. But there is a tug of war between minimizing the harm and destruction of a majority of the world’s population due to the shut down of many aspects of the economy versus lowering the contagion rate and deaths directly related to the virus. How these competing factors play out is anyone’s guess. For perspective, according to the United Nations, Department of Economic and Social Affairs, Population Division (2019). World Mortality 2019: Data Booklet (ST/ ESA/SER.A/436), in 2019 the number of global deaths was 53,395,000 and the number of deaths in the U.S. was 2,909,000. As of April 20, the Center for Systems Science and Engineering at John Hopkins reported the total number of deaths in the U.S. due to COVID-19 at 40,683. There are also indications that many more people have contracted coronavirus and recovered than previously thought based on antibody testing and other early studies implying perhaps the virus may have spread earlier and faster than indicated in many regions. Rather than pontificate and dive deep into the issues, I’ll let you draw your own conclusions from these data points relative to the coronavirus and our efforts to control it. I do believe at some point in the near future, political and social policy will put precedence on mitigating the harm of continuing to shut down many aspects of the economy over the drive to lower the absolute contagion rate and deaths directly related to the coronavirus. 

The Effect on Jobs & Industries: After speaking with many clients and colleagues, and reading as much as possible, I’m seeing some trends. Anecdotally, I see medical and law firms furloughing employees and cutting compensation 20% to 40%. Hospitality and restaurant owners are getting crushed, while accountants and property/casualty insurance owners may be less impacted. Retirees have been living on social security and pensions and had been previously living within their fixed budgets have been doing relatively fine and employees who have lost their jobs are obviously affected the most.

The Key To Surviving The Crisis: I’ve broken things down based on my opinion of two broad categories: long term and short term.

  • Long Term: I recommend investors who have implemented long-term strategic investment strategies and are well diversified focus on how they think their portfolios will suit their needs 10, 20, and 30 years from now and beyond. With that in mind, there are no indications the risk-return opportunities that have been available over the past decades are not still available. If investors try to time the market to take advantage of perceived good or bad news in the short term, their long-term future returns could very well be affected. The fact that the financial markets were healthy prior to the pandemic suggests the possibility of a relatively good recovery post-pandemic. Having said that, no one will be able to predict the timing, length or magnitude of any future recovery and the longer the brakes are put on the ability for people to fully engage in business, the longer a recovery might take.
  • Short Term: The short-term risk is very simply a cash flow risk and in my opinion this is the biggest risk we all face. This is the risk of businesses and individuals not being able to satisfy their obligations, whether they be mortgages, leases, rents, payrolls, etc. due to a reduction in their cash flow. That being said, I encourage everyone to consider renegotiating with all creditors — landlords, suppliers, banks, insurers and lenders — if needed. When it comes to who to turn to for support, CPAs are probably better positioned for specifics on tax relief while attorneys may be best qualified to negotiate with creditors. A couple of points on this:
    • Mortgage forbearance versus mortgage loan modification: Forbearance is merely a postponement of payments for a period of time. Once the period of time is over, it’s presumed you’ll have to pay the full amount previously delayed. Unless you think you’ll magically come up with the funds necessary to satisfy your obligation at the end of the forbearance period, negotiating for a loan modification might make more sense.
    • Paycheck Protection Program: This is for business owners who need relief for payroll. It’s implemented by the SBA with support from the Treasury Department, but is applied for through a financial institution. I’ve had at least three clients apply for this program and heard of at least one business owner getting funded within one week. Having said that, this program and others are new, so there’s ample room for frustration in the application process; don’t expect a one-day turnaround.

CARES Act Items of Interest: There are a number of provisions in this act that may be of particular interest to you, including those that could impact investment and retirement accounts. Here are some areas that may warrant further discussion and planning: 

  • It waives 2020 required minimum distribution (RMD) requirements.
  • It allows already-taken 2020 RMDs to be rolled back into accounts.
  • Prior to this bill, retirement plan participants could take loans from accounts of up to 50% of their balance, or a maximum of $50,000; those limits have been doubled to 100% of their balance or a maximum of $100,000.
  • Retirement investors can take as much as $100,000 out of their account this year without the 10% premature withdrawal penalty if they are diagnosed with coronavirus or suffer financial harm due to it.
  • Some student loan payments and interest accruals are waived until September 30, 2020.
  • Workers with up to $75,000 in adjusted gross income — $150,000 for couples filing joint tax returns — are eligible for a one-time payment of $1,200 for individuals and $2,400 for couples, plus $500 per child. These payments have already started.

Ongoing Portfolio Management & Rebalancing: An Important aspect of portfolio management is the initial planning conducted at the front end to help us determine an appropriate investment strategy that will meet our clients’ needs through many types of market cycles. During times of high volatility, there are additional considerations I covered in my recent article, “Rebalancing Portfolios in Times of High Volatility.”

In summary, it’s not a time to be overly optimistic, but neither is it time to be overly pessimistic. Diversified investment portfolios are generally resilient and we have no reason to believe they won’t continue to be resilient moving forward.  As I’m sure you’ve seen, the markets can move very quickly with seemingly conflicting information. If you saw the recent news article that 6.6 million people were laid off, it would probably seem clear that the stock market would decline. But the opposite happened; the S&P 500 had its best week in 45 years.  This is an example of the paradox of investing and the difficulties of trying to predict the movement of the markets in the short term.

Of course, many have stated that the market itself is the most efficient means to price securities, so don’t try to outsmart it. Focus on what you can control and try not to stress about those things beyond your control, but be proactive in taking advantage of some of the unprecedented help the government is offering. As one of my clients put it, “This is no fun, but I’m glad you told me to have some cash reserves set aside and that we had a plan in place.” Indeed, there are flowers out there and more to come, but they’re admittedly hard to smell with a mask on. 

Indexes Through March 31st 2020

Table disclosures and (http://worthpointeinvest.com/disclaimer/) performance for periods greater than one year are annualized. Selection of funds, indices and time periods presented are chosen by the client’s advisor. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results. Russell data copyright © Published and maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group,, all rights reserved.www.ftse.com  The S&P data are provided by Standard & Poor’s Index Services Group.  www.spdji.com MSCI data copyright © MSCI 2020, all rights reserved. www.msci.com. Barclays Capital data provided by Barclays Bank PLC.  www.bloombergindices.com.

The recent downturn has negated the returns from the last three years, but the indexes referenced above are healthy for the last 10 years, even with the pandemic-related downturn baked into them. Year-to-date as of March 31 2020, all stock indexes referenced in the table above are down significantly, with the Russell 2000 showing the deepest decline at -30.61%, followed by the S&P Global REIT Index at -28.80%. The Bloomberg Barclays U.S. Government Bond index was the best performing reported index for the first quarter with an 8.08% return. 

Interest rates decreased in the U.S. Treasury market in the first quarter, with the yield on the 5-year Treasury bond ending up at 0.37%, the yield on the 10-year note ending up at 0.70% and the 30-year Treasury bond ending up at 1.35%. 

Yield curve data from Federal Reserve. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2020 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2020 ICE Data Indices, LLC. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

about the author: Morgan H. Smith Jr. IMBA CFP®

Morgan Smith Jr. IMBA, CFPMorgan H. Smith Jr. IMBA CFP, who has been a fee-only financial planner for over 12 years, specializes in wealth management for successful families, business owners, retirement plans and institutions requiring a disciplined fiduciary process.

An Assistant Professor at the University of San Diego, Morgan has been a frequent speaker to many professional organizations and has appeared on CNBC, Fox Business New Live and is a founding member of the Strategic Trusted Advisors Roundtable.

Learn More and/or Contact Morgan

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